Global Stock Markets Pricing In Recession

Stock markets are now entering a period of painful decline as countries around the world face up to the prospect of recession. While interbank lending has eased tentatively as central banks’ measures to inject cash loans to banks unblocked the credit crunch, investors have little time to absorb the good news.

Poor corporate earnings, analyst downgrades, and bleak economic indicators paint an ugly picture, not only for investors but also the general public. Many people are already adjusting their extravagant lifestyles, spending less on luxury items and giving fine dining a miss, in anticipation of pay cuts and retrenchment. Let’s look at some of the widening impact of the financial crisis and recession fears.

1. Wachovia lost $24 billion in 3rd quarter 2008, the largest deficit ever reported by a bank. This is in stark contrast to its earnings of $1.62 billion in the previous year. The bulk of charges came from impairment of goodwill and market disruption losses. Its merger with Wells Fargo was timely as a bank run by depositors in recent weeks was turning deadly.

2. Goldman Sachs will eliminate 3200 employees. This represents 10 per cent of its 32,569 employees. If Goldman Sachs, the most profitable investment bank and a rare gem in Wall Street to have navigated the credit crisis skilfully, is retrenching, you can be sure other banks will be more ruthless in their restructuring.

3. General Motors and Chrysler plan to layoff an unspecified number of salaried workers in preparation for a possible merger to stave off bankruptcy. GM’s prospect of surviving past its centenary birthday seems to be diminishing as it runs out of cash and ideas.

It is bleeding money to the tune of $1 billion per month and time is not on their side as sales slowed to a trickle in a global recession and downgraded credit ratings make raising cash difficult. The downfall of Detroit’s Big Three (GM, Ford and Chrysler) will have far reaching ramifications on the economy as the entire supply chain of smaller companies will be placed in jeopardy.

4. Weekly jobless claims rise 15,000 to 478,000. If it is any consolation, weekly jobless claims remain well off the seven-year high in September 27th, when the figure rose to 499,000, the highest level since the September 11th attacks.

5. China’s economy growth slows to 9.9, declining 2.3 percentage points from the same period last year and falling to a single digit for the first time over the past five years. Foreign trade, a major driving force of the national economy, contributed 8.9% to GDP, as compared to 12.5 percent last year.

Investors can seek solace from Premier Wen Jiabao’s recent commitment of “flexible and prudent macro-control policies to combat the ensuing unprecedented challenges, striving for the stability of the country’s financial sector, capital markets and economy at large.”

Strong words but actions will ring louder for the thousands of factories and retailers about to close shop in China.

6. Japan’s trade surplus shrinks 94%. Exports rose 2.1% while imports gained 16.1%. Once again, this is another indication that nobody is immune to the troubles in US, that applies to Asia’s economic powerhouses too. Proponents of decoupling theory for emerging markets are realizing that nothing has changed over the past decade – if the US sneezes, the world will still catch a cold.

7. Sweden and New Zealand have started cutting their interest rates and will most likely force other countries to follow suit.

8. UK retail figures are worst since 2006 and Britain is now officially in recession since the early 1990s, with tighter credit, soaring living costs and unemployment crushing its economy.

9. Unraveling of the Japanese yen carry trade as Australia, New Zealand dollars slump. No currency crisis just yet but let’s keep our fingers crossed.

US President George Bush has hastily arranged another global summit to discuss ways to stabilize the financial situation and rescue the economy. However, I doubt if the fall in global stocks can be stopped any time soon, regardless of what actions the US government, Federal Reserve or other central banks take in the next few days, be it rate cuts or increase in loans.

Further declines in U.S. home prices are likely, which will only create more losses in the financial sector. There’s certainly room for another 25-30% fall in the stock market given the dire forecasts on profits. At the moment, the bears are calling the shots and you can’t be bearish enough in this climate.

The recent volatility can be attributed to many hedge funds that made ill-timed bets on stocks, currencies and commodities and are now facing massive redemptions (cash calls from their investors) as well as forced selling” due to margin calls.

With a margin call, an investor has to sell to pay back a loan or top up his account with more funds because the security purchased with borrowed money has fallen to a certain level. One way to raise the cash quickly is to sell off liquid assets, such as stocks.

Hedge funds often do not have the luxury of sitting on losses and investing for the long-term with a buy-and-hold strategy. They have to sell regardless of loss or profit in order to meet clients’ redemptions. As such, a lot of hedge funds (especialy the minnows) are not expected to survive this crisis. The early birds who cash out may get their money back but for investors who have fallen behind, they may be left with huge losses.

Another wave of massive selling is probably yet to come. We have seen the fallout from toxic mortgage debts and seconds are ticking away from the time bomb of credit card debts. Until we have experienced and dealt effectively with all components of collaterized debt obligations, can I say that the storm has abated.

Since we cannot escape the fact that the murky and largely unregulated hedge funds are major players in global financial markets, investors who are risk averse should stay out of their way as they stampede for the exit. Timing a technical rebound to make quick profits is not a game for risk averse and cash-tight investors.

If your long term objective is not to trade but invest, then now is as good a time as any to buy up blue chips. A lot of blue-chip stocks are looking very attractive with dividend yields that are higher than bonds. By putting money into the stock market incrementally and averaging down your costs, you may feel that this strategy is stupid and not pay off for a while but ultimately, you will get rewarded.

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1 Comment

Filed under Business, Economy, Hedge Funds, Stocks

One Response to Global Stock Markets Pricing In Recession

  1. Great summary. I enjoyed making the Top 5 with you at Feed The Bull.

    gamingthemarkets last blog post..Front Running A Systemic Market Crash: PPT Style

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